What You Need to Know about Mutual Funds: Explore Its Pros and Cons
If you are a newcomer in the investment world, you might find things totally overwhelming at first. Did you ever hear of the adage “Don’t put all your eggs in one basket?” Well, this is a great advice for you to live by, whether you are a beginner or an experienced investor who wants to reduce your risks.
This is exactly where mutual funds come in handy. A mutual fund is a company which pools money from various investors in order to buy bonds, stocks, real estate and other forms of assets. The combined holdings of assets are known as a fund’s portfolio. When you buy shares of a fund, you will own a piece of these holdings. Once your money is divided like this, you can be sure that you don’t have to put all of your “eggs” in a single “basket.”
The Good Side of Mutual Funds
Mutual funds are a great place to start for every new investor. It doesn’t matter if you have very little investing or financial experience because you can still enter the world of stock market with a relatively small amount of initial investment. This is also a convenient way to get a properly diversified package which could have been otherwise difficult and complicated to manage by yourself.
Another benefit of mutual funds is that investing in them ensures you of a professional and expert management. There is no need for you to worry about the daily management of your stocks since you are paying the investment firm to do this task on your behalf. These experienced professionals manage money for a living and they have the skills needed for handling your money wisely.
Finally, mutual funds are a very appealing investment to many people due to their ease of purchase. Many banks have their own line of funds so it might only take a trip to the local bank in your area. Due to the relatively low price of admission, most first time investors consider these a wonderful choice.
The Not So Good Side of Mutual Funds
Just like other things in this world, mutual funds are far from being perfect. As with everything related to the stock market, there are some elements of a gamble to mutual funds.
First off, when you invest in them, you put your trust on the investment firm. This is usually the appeal of these funds, where you give responsibility to people who have the necessary experience. However, what if your chosen manager doesn’t have the knowledge and experience it takes to maintain a fund properly? If you are not in luck, you could end up placing your money in the hands of someone who could do unwise things with your hard earned cash. Take note that even if your fund ends up losing money, your manager will still get paid.
Other disadvantages to mutual funds are the taxes and fees. No matter what the performance of your fund is, you still need to pay sales commissions and annual fees. You also need to pay taxes on capital gains you earn with your fund.
Mutual funds are a lucrative way to invest in a certain industry of your interest with no need for a big initial investment. Through careful research and proper weighing of its pros and cons, you can increase your chances of success in mutual fund investing.